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The cost of liking Facebook's IPO

by Richard Morgan | Published May 8, 2012 at 1:34 PM

Facebook Inc. had good reasons to friend so many underwriters of its forthcoming initial public offering. But at least one of those reasons has as much to do with lowering borrowing costs as it does with issuing stock.

Ten of its top 11 bookrunners have, in fact, agreed to provide Facebook with an unsecured revolving credit facility of $5 billion. And the rate assigned to that revolver is set at LIBOR plus 1%.

This works out to loans of $500 million apiece, should the revolver be fully drawn, for which each lender would charge, using today's one-month LIBOR of 24 basis points, 1.24%. Not at all bad for Facebook, according to bank sources, who noted that borrowing costs for some of the institutions funding the revolver are 100 to 300 basis points higher than the rate the revolver would return.

Just splitting the difference -- that is, calculating the effect of 200 basis-point differential -- indicates that each of these institutions stands ready to take a loss on its Facebook revolver of $10 million a year. That, in turn, means a loss of $50 million over the course of the credit facility's duration.

Although Facebook's most recent registration statement reported that nothing had been drawn on the revolver, that's expected to change in the months following the IPO. One credit need frequently cited by the company concerns tax-withholding and remittance obligations of its restricted stock units, or RSUs.

"If the price of our common stock at the time of settlement were equal to the midpoint of the price range on the cover page of this prospectus," the S-1 stated, "we estimate that this tax obligation would be approximately $4 billion."

The revolver would cover that and then some. But the fact that Facebook got all of its bookrunners except Allen & Co. LLC to subsidize this outlay, in exchange for bragging rights as part of the most anticipated IPO in years, prompted one banker to comment, "Very masterly done." Only he worries, for his own good reasons, that it could become a trend.

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The cost of liking Facebook's IPO

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